Attitude Check: Overcoming The Fear Factor

Traders without confidence are no traders at all and unfortunately Mr. Market could care less about giving anyone a break because they've "suffered enough."

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Fear ultimately comes from a lack of confidence and can cripple even the strongest trader. We would all love to bottom-tick Bank of America (BAC) or top-tick Google (GOOG), but that won't happen and if you happen to get a trade incorrect, which you will, it will affect your confidence.

I have seen fear take down many and ironically it is not the paralyzing effect that most are ultimately challenged by, it is the way in which one attempts to overcome fear that can be incredibly dangerous.

What is the best trading attitude to have and how can it help you succeed? Find out in Attitude Check: Where's Yours?Trading is a unique craft unlike anything else, and can't always be lumped into metaphorical comparisons to other life issues. For example, let's say that as a child you had a terrible experience standing in front of a crowd and therefore you struggle with a fear of public speaking. Most would agree that in order to overcome this fear, you should boldly face the fear and soon it will be behind you. A fear of heights is often met with the same recommendation and many other fears just the same. Due to this common understanding, people tend to adopt this same thesis when fear strikes in trading. I have seen it countless times, where an individual who has successfully overcome fear in other areas of his or her life boldly steps out in trading in attempt to restore confidence.

The trader increases his position sizing in attempt to make up losses quickly. The trader deviates from his style trying other trading strategies or flipping sides in an erratic fashion in an attempt to right the ship. Despite the attempt to face the fear boldly and overcome it, the irrational behavior leads to further losses and the trader is smacked down once again, not only significantly damaging the emotional capital, but creating severe financial damage that, if enough, is too much to overcome. This is why dealing with fear, which ultimately stems from a lack of confidence, must be handled in a very special way when it comes to trading stocks.

I don't care who you are, how long you have been trading or how successful you have been, there will be times when your confidence is challenged. A trade will go terribly wrong, or you will run into a very cold streak that seems to go on forever. Whatever the case, over time this issue will not just start to eat away at your financial capital, but also your emotional capital, significantly damaging your confidence. Traders without confidence are no traders at all and unfortunately Mr. Market could care less about giving anyone a break because they've "suffered enough." There is no mulligan in trading, no run rule that stops the game or a white towel that can be thrown in to stop the fight. Just when you think Citigroup (C) is done going down, it plummets further. When you can't take any more pain with Toll Brothers (TOL) the stock is sure to bounce. Mr. Market has a cruel sense of humor and this is the way it happens on many occasions.

So, how does one handle those times when we face fear due to a lack in confidence?

1)Clear Out the Position Sheet: Yup, you got it, sell it all. Odds are, you not only have already experienced loss but most 'fear' or 'confidence crushers' are because you are still fighting with various positions in your account. Hit the sell all button and rid yourself of any more pain.

2)Take Time Off: Depending on how damaged you are, this may be a day, a week or maybe even several. This step is crucial and one in which most traders skip at their own risk. Get away from the markets, clear your head, and remember that there is much more to life than trading stocks. The market will be there when you return, and forget the thoughts of 'missing out.' It is not time lost, but time restored.

3)Don't Look: Odds are when you cleared out your position sheet the stocks you sold or covered did exactly what you wanted them to do while you were holding them. That is always Mr. Market's way of squeezing out the last little ounce of confidence you may be holding onto. If you return to your desk, turn on the computer and review that which you sold or covered before you left, you will return to the state of mind you were in before your break. Don't do it. Don't think about it. Forget it.

4)Paper Trade: Before setting back out on to the financial trail of success, get a feel for the market. Even if I have taken one day off, I always feel a bit out of touch with the environment and need to take it slow. Rather than risk capital, I like to do a little paper trading to see how stocks are generally acting. If this is met with success, it is time to wade back in.

5) Take it Slower Than Slow: When you begin your trading again, it will be extremely important for you to take your trading very slow. Reduce your position sizes to partials and do not over commit yourself. Get a feel for a few successful trades. Remember what it felt like to make some money and all of sudden you will start to feel the confidence trickle back in.

6)Learn From Your Past: Like taking time off, most traders also skip this step, which I never understand. Once you have restored your confidence and are back at it, trading away. Take some time to review your previous trades to analyze what put you into the position you were in. Look at the stocks, your strategy, your methods, and do your best to pinpoint exactly where you went wrong. Update your rules and keep them close so you do not fall into the same trap again.

7)Restore and Repeat: There are two things I can promise you if you follow these suggestions. First, your confidence will return but second you will go through this process numerous times over the course of your trading career. Does it get easier to handle? Not really, but take refuge in the fact that at least now you have a plan and can handle it in a very structured and organized manner.

Trading without fear is key to long-term success but there is no question at times this will be challenged. Understand it, embrace it and know what to do about it. This will set you apart from most and keep you on the long term path towards success.